On November 9, 1995, Canada and the United States ratified the Third Protocol to
the Canada-US. Income Tax Convention. The Protocol will benefit Canadians engaged
in cross-border business as it eliminates many pre-existing tax barriers to trade and
investment. However, the Protocol also includes a controversial Limitation on Benefits
('LOB') Article, intended to prevent treaty shopping by Canadian resident entities.
This thesis will analyze the LOB Article and examine its problems and the potential
pitfalls which Canadian taxpayers should be aware of when conducting cross-border trade
and investment. These problems fall into five categories. First, the LOB Article is
difficult to apply in practice because it contains complex tests and several undefined and
vague terms. Second, the LOB Article has the potential to deny treaty benefits to entities
engaged in bona fide non-treaty shopping activities. Third, Canadian resident entities
which have, or plan to have, U.S. source income will be required to take into account the
LOB Article's extremely complex rules and plan appropriately whenever there is a change
in the share ownership of their Canadian businesses or an increase in the level of expense
payments to third country residents. They will have to conduct regular reviews to ensure
that they are in compliance with the LOB Article. Fourth, the LOB Article could have the
unplanned effect of re-directing tax revenues from Canada to the U.S. Finally, the LOB
Article violates two of the three goals of tax treaty policy: the prevention of double
taxation and the promotion of stability.
This thesis concludes that the inclusion of the LOB Article in the Protocol was
politically and bureaucratically motivated by U.S. tax authorities' zeal to halt treaty
shopping at all costs. The inclusion of the LOB Article demonstrates the preoccupation of
the U.S. with eliminating treaty shopping. This preoccupation appears to take precedent
over the basic goal of international tax treaties, which is the facilitation of trade and
investment through the removal of tax barriers to the free exchange of capital, goods and
services. Further, this thesis concludes that Canada should not have conceded to the
inclusion of the LOB Article in the Protocol because its negative impact on some Canadian entities and the Canadian economy will outweigh the Protocol's potential
benefits for Canada.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/4742 |
| Date | 11 1900 |
| Creators | Theodorakis, Tom |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Relation | UBC Retrospective Theses Digitization Project [http://www.library.ubc.ca/archives/retro_theses/] |
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